Strategic alliances

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Strategic alliances are common to any industry. Their presence is felt quite significantly in the airline industry. Starting in the US in 1978 deregulation of airline industry has since brought about sea changes in functioning of the industry. These strategic alliances exist in various forms and differ widely in scope and no consensus on classification was found. The advantages and disadvantages of strategic alliances with respect to the airline industry have been discussed. It is felt that the industry is getting increasingly concentrated. However, no conclusive remarks can be made about consumer welfare

Several authors have pointed out various reasons for formation of strategic alliances in the airline industry. Burton and Hanlon (1994) opine that alliances are central to formulation of business strategy. Further, they argue that in airline industry there are no a priori reasons for consolidation through alliances. The airlines enter into alliances to gain economies of scale and more importantly, that of scope.

Youssef (1992, as quoted in Youssef and Hansen, 1994) has put forth two theories that try to explain the reason for alliances to take place. The first theory is related to attaining the technical efficiencies of lower production costs/ better service characteristics available to larger airlines in comparison to smaller airlines. The alliances allow the partners to consolidate facilities like maintenance bases. Also, each airline then has increased geographical reach and the network increases. This increase in network coverage has the benefit of improved quality and quantity of service (with assumptions about passenger acceptability) that are fallout of either better schedule coordination or perception by the passengers. Secondly, with increase in network there will be enhanced benefits of frequent flyer programs that may be offered to the passengers. Thus, there will be more attractions for passengers to fly a particular airline and the airlines are immensely benefited as they have increased coverage without increasing their individual route systems. This may then lead tolower unit production costs and economies of network density result.

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The second explanation for the formation of strategic alliances is their possible use to limit competition in the markets. As there exist several restrictions on market and route entry, capacity and pricing in domestic and international aviation markets, strategic alliances enable formation of virtual monopolies in markets between the hubs of alliance partners. This can limit the competition through monopolization in the hubs. In addition, there will be disincentive for any other airline to expand through internal expansion. Clearly, the biggest motivation for airlines to enter into alliances is to expand market feed. Some airlines that are dominant in ...

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